Covid-19 and MSME India – Time to Act NOW
The Macro-Economic Framework Statement 2020-21 expected the nominal growth of the Indian economy to be 10 percent in the financial year 2020-21. Moody’s Global Macro Outlook 2020-21 recently released cut the India growth forecast to 2.5%1.
Micro, Small and Medium (MSME) contribution to the Indian economy, in providing employment opportunities throughout India (including the rural & backward areas) and the well-being of its citizens cannot be overstated. The share of MSME in India’s GDP was 28.90% during year 2016-172. During period 2015-16 there was 63.388 million unincorporated non- agricultural MSMEs in the country (51.25% in rural area) engaged in different economic activities (almost 66.27% owned by socially backward groups) employing 110.989 million (44.85% in rural area and 55.15% in urban area)2. A vibrant and growing MSME sector is crucial to the overall growth in the Indian economy.
India lockdown for 21 days starting midnight of 24th March 2020, productivity loss, lack of workforce, cash crunch, increased working capital requirement, disrupted logistics and supply chain coupled with recent slowing of domestic demand and a world in recession, has hit businesses in India badly on both the supply as well as demand side. The economy has almost come to a halt. It would be unfortunate should capital formation be the next casualty.
In today’s grim situation with future looking increasingly uncertain it is the MSME sector, with almost 99% being in the Micro3 sector, 66.42% of which are owned by socially backward groups providing employment to 97% of total employment in the sector1, which will struggle for its very survival. A lasting adverse impact on the MSME sector would be disastrous for India.
India recently has taken some welcome steps to improve liquidity in the financial markets, announced relief package for the poor and relief measure for the taxpayers to mitigate the impact of coronavirus. However much more needs to be done. For a start, the COVID-19 Economic Response Task Force needs to be in place for a relatively long time period and be made available all the necessary support and authority it needs to deliver India out of the huge economic crisis India is staring at.
- https://economictimes.indiatimes.com/news/economy/indicators/moodys-slashes-india-gdp- growth-in-2020-to-2-5/articleshow/74840446.cms?from=mdr
- Annual Report 2018-19 Ministry of Micro, Small and Medium Enterprises, Government of India
- As per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, micro enterprise engaged in manufacturing is one in which investment in plant & machinery does not exceed Rs 2.5 million and Rs 1 million for one which is engaged in service sector
This article is an attempt to seek the problems which MSME sector in India is facing and innovative solutions which could be shared with the policy decision makers for their consideration. A few thoughts, in no means to be taken as comprehensive, are being grouped, again not to be considered final, for the sake of initiating brainstorming and out of box thinking and soliciting responses to the stated objective. While it is a fact that there cannot be a one size fits all solution for MSME sector considering the huge complexities and diversities in India, a start is the need of the hour.
At the outset, few fundamentals are being laid down without which the whole purpose is defeated and the exercise may well be futile.
1. The leadership and decision makers are benevolent
2. There is utmost faith amongst the different players in the system. The positive effects of measures taken on faith would far outweigh its negatives.
3. Uniform identification criteria for determination of MSME unlike what is prevailing today.
A turnover based one is most practical under the circumstances.
Liquidity The immediate need for MSME sector is cash to enable it to meet its short-term working capital needs failing which many may simply not be able to survive.
- Receivables from Government & Government Undertakings: Payments for approved invoices upto a cut-off date say 31st March 2020 be released immediately irrespective of the payment terms
- Receivables from Large Corporates say turnover exceeding Rs 1 billion: Although MSMED Act 2006 provides for payment timelines, the coverage is limited to registered entities. Payments which are due must be released for any MSME irrespective of whether its registered or not.
- Tax (GST/Income Tax) refunds: With complete visibility of data available to the authorities, part say 90% of refunds sought upto a cut-off date say 31st March 2020 be released immediately on provisional basis.
- GST liability: Under the erstwhile service tax legislation, individuals and partnership firms having turnover upto Rs 5 million in previous financial year were given an option to pay service tax on realisation basis. The option to pay on realisation basis can be extended to the whole of MSME sector effective April 2020.
- Working capital limits: Existing limits be increased proactively to enable businesses to meet their significantly enhanced short-term working capital needs without seeking additional security or undertaking extensive paperwork.
- Salary and wage support: Salaries/wages for 3 months period April ‘20-June’20 be partly reimbursed to Micro & Small sector enterprises to enable staff retention and prevent crucial skills & knowledge gained with tremendous effort & over time to go waste.
- Utility payments support: The payments towards utility bills be deferral without interest for a period of 3 months apart from reduction in tariffs.
- Bill Discounting Scheme of National Small Industries Corporation: The bill discounting scheme of NSIC requires Bank Guarantee as security as well as sets limits for both Buyer as well as Seller. In today’s circumstances, setting of limits not only causes delays but also acts as an impediment to timely support and can be temporarily done away with. Requirement of Bank Guarantee for transactions with State and Central Government Departments/Undertakings does not make sense at all. There should be no such requirement. Further such bill discounting should be on non-recourse basis.
- Collateral Free Loan: The assistance limit by Credit Guarantee Trust Fund for Micro & Small Enterprises should be enhanced and eligibility criterial relaxed. The lending institution should make sure that no security is taken for businesses eligible under the scheme.
- Income Tax liability: The income tax rate for partnership firms should be brought at par with corporate tax rate.
Capital It is of utmost importance to preserve entrepreneurial spirit as capital formation must continue.
- Grant: Direct financial assistance in the form of grants should be provided to enterprises based on tangible criteria such as staff continuity
- Asset creation: Assistance in the form of unsecured loan at nominal rate of interest with long payback period be provided for purchase of productive assets.
- Loan write off: Banks to write off loans to micro enterprises catering to rural areas
Demand The slowing of domestic demand in recent past is likely to accelerate further making it even more difficult for MSMEs to survive. It is essential that money be available with individuals and households to boost sentiment and consumption.
- Individual income tax refunds: With complete visibility of data available to the authorities, part say 90% of refunds sought upto a cut-off date say 31st March 2020 be released immediately on provisional basis.
- Government as customer: Increased allocation towards procurement from MSME by Government on most favourable payment terms (even as advance) be done
- Income tax: The income tax rates for individuals should be reduced to make available more cash in hand
Compliances It is essential that depleted resources be preserved to sustain the enterprise and create a platform for the future. The resources need to be effectively deployed for critical & immediate business needs to survive.
- The rigours of various compliances need to be deferred for at least 6 months. Penalties should not be levied.
- Compliance timelines under various statutes should be staggered in such a manner so as not to overlap.
It is feasible, practical and logical to have large establishments such as banks front end the implementation. With effective utilisation of existing systems and resources, large establishments can deliver on-ground while also providing the data needed by authorities for decision making and assessment. The compensation to them for their efforts and losses may also improve their financials and provide gainful employment to their crucial human resource.
The impact of this pandemic in India may well be long term for the MSME sector in particular due to its inherent vulnerability. Measures need to be taken immediately to support the MSME sector on liquidity, supply side and capital needs, both short term and long term. This is not the time for ad-hoc or half-hearted measures. It is crucial that firm measures be taken which take into consideration both short term as well as long term needs, are unambiguous, widely publicised, promptly executed, strictly adhered to, successfully delivered and tweaked/altered on need basis by adopting a flexible approach.
Looking forward to receiving information on issues faced and innovative solutions for MSMEs.
Rajesh Lal
Chartered Accountant
☎: +91-9971033977
✉: rajeshlal@rajeshlalandco.com
LinkedIn: https://in.linkedin.com/in/rajesh-lal
